PAID TAX RETURN 

PREPARERS

In a Limited Study, 

Preparers Made 

Significant Errors

Statement of James R. McTigue, Jr., Director

Strategic Issues

Testimony 

Before the Committee on Finance,

U.S. Senate

For Release on Delivery

Expected at 10:00 a.m. EDT

Tuesday, April 8, 2014

GAO-14-467T

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-14-467T, a testimony 

before the Committee on Finance, U.S. 

Senate

April 2014

PAID TAX RETURN PREPARERS

In a Limited Study, Preparers Made Significant Errors

Why GAO Did This Study

For tax year 2011, an estimated 56 

percent of about 145 million individual 

tax returns were completed by a paid 

preparer. IRS has long recognized that

preparers’ actions have an enormous 

effect on its ability to administer tax 

laws effectively and collect revenue 

that funds the government. Likewise, 

many taxpayers rely on preparers to 

provide them with accurate, complete,

and fully compliant tax returns. 

GAO was asked to review the 

oversight and quality of paid preparers. 

This testimony examines (1) how 

preparers are regulated by IRS and (2) 

the characteristics of tax returns 

completed by preparers based on 

products GAO issued from April 2006 

through August 2008 and work 

conducted from November 2013 to 

April 2014. GAO reviewed laws, 

regulations and other guidance and 

interviewed IRS officials. GAO 

analyzed IRS Statistics of Income data

from tax year 2011, the most recent 

data available, and the NRP database, 

which broadly tracks compliance. To 

gain insight on the quality of service 

provided, GAO conducted 19 

undercover site visits to commercial 

preparers in a metropolitan area.

Criteria to select the metropolitan area 

included whether the state regulates 

preparers and levies an income tax.

What GAO Recommends

If Congress agrees that significant 

preparer errors exist, it should consider 

legislation granting IRS the authority to 

regulate paid tax preparers. Technical 

comments from IRS were incorporated 

into this report.

What GAO Found

The Internal Revenue Service’s (IRS) authority to regulate the practice of 

representatives before IRS is limited to certain preparers, such as attorneys and

certified public accountants. Unenrolled preparers—those generally not subject 

to IRS regulation—accounted for 55 percent of all preparers as of March 2014. In 

2010, IRS initiated steps to regulate unenrolled preparers through testing and 

education requirements; however, the courts ruled that IRS lacked the authority.

GAO found significant preparer errors during undercover site visits to 19 

randomly selected preparers—a sample which cannot be generalized. Refund 

errors in the site visits varied from giving the taxpayer $52 less to $3,718 more 

than the correct refund amount. Only 2 of 19 preparers calculated the correct 

refund amount.

Refund Amounts Over or Under the Correct Amount

The quality and accuracy of tax preparation varied. Seventeen of 19 preparers 

completed the correct type of tax return. However, common errors included

• not reporting non-Form W-2 income (e.g., cash tips) in 12 of 19 site visits;

• claiming an ineligible child for the Earned Income Tax Credit in 3 of 10 site 

visits where applicable;

• not asking the required eligibility questions for the American Opportunity Tax 

Credit; and 

• not providing an accurate preparer tax identification number. 

These findings are consistent with the results of GAO’s analysis of IRS’s National 

Research Program (NRP) database. GAO analysis of NRP data from tax years 

2006 through 2009 showed that both individuals and preparers make errors on 

tax returns. Errors are estimated based on a sample of returns, which IRS audits 

to identify misreporting on tax returns. Tax returns prepared by preparers had a 

higher estimated percent of errors—60 percent—than self-prepared returns—50 

percent. Errors refer to changes either to the tax due or refund amount.

View GAO-14-467T. For more information, 

contact James R. McTigue, Jr. at (202) 512-

9110 or mctiguej@gao.gov.
Page 1 GAO-14-467T 

Chairman Wyden, Ranking Member Hatch and Members of the 

Committee:

I am pleased to be here today to discuss the quality of services provided 

by paid preparers. Paid preparers play an integral role in our voluntary tax 

system. Millions of taxpayers rely on paid preparers to provide them with 

accurate, complete, and fully compliant tax returns. The Internal Revenue 

Service (IRS) has long recognized that paid preparers’ actions have an 

enormous impact on its ability to administer tax laws effectively and 

collect the revenue that funds the government, including minimizing the 

estimated $385 billion net tax gap.1

In 2006, we reported to this Committee on the results of an investigation 

where we identified mistakes in 19 out of 19 of our visits to paid preparers 

working in commercial preparer offices.

In tax year 2011—the most recent 

data available—paid preparers completed approximately 56 percent of all 

individual tax returns filed. A large segment of the preparer industry is not 

subject to testing or education requirements.

2

My statement today is based on reports issued from April 2006 through 

August 2008 and work recently completed at the request of the 

Committee.

Some of the mistakes were 

significant, either exposing taxpayers to serious IRS enforcement action 

or resulting in unwarranted refunds of up to $2,000. At the request of this 

Committee, we once again went undercover in February of this year and 

once again found significant errors that I will highlight today.

3

 1

The net tax gap is the difference between taxes owed and taxes paid after accounting for 

IRS enforcement actions. The amount listed above is for tax year 2006, the most recent 

IRS tax gap estimate.

Our objectives were to (1) examine how paid preparers are 

regulated by IRS and applicable states (i.e., states that regulate paid 

preparers) and (2) evaluate characteristics of tax returns completed by 

paid preparers.

2

See GAO, Paid Tax Return Preparers: In a Limited Study, Chain Preparers Made

Serious Errors, GAO-06-563T (Washington, D.C.: Apr.4, 2006).

3

See GAO, Tax Preparers: Oregon’s Regulatory Regime May Lead to Improved Federal 

Tax Return Accuracy and Provides a Possible Model for National Regulation, 

GAO-08-781 (Washington, D.C.: Aug. 15, 2008).
Page 2 GAO-14-467T 

In preparing this statement, we did the following work from November 

2013 through April 2014:

• We reviewed laws, regulations, and other guidance and interviewed 

IRS officials.

• We analyzed IRS’s Statistics of Income (SOI) individual taxpayer 

database for tax year 2011, when the most recent data were 

available, to determine income levels of taxpayers that used paid 

preparers and characteristics of the tax returns that these taxpayers 

filed.

• We had tax returns prepared for us at 19 randomly selected locations 

of several commercial preparers throughout a major metropolitan 

area. We chose the major metropolitan area based on criteria such as 

(1) location in a state that does not regulate paid preparers, (2) 

presence of multiple commercial preparers, and (3) location in a state 

that does not levy an income tax. Our investigators posed as 

taxpayers and asked paid preparers to prepare, but allow us to file, 

our federal tax returns under one of two scenarios, as described later 

in this testimony. The two tax scenarios incorporated a range of 

commonly used IRS forms and lines on the Form 1040. Because our 

19 site visits are limited in size, results cannot be used to generalize 

our findings to the retail tax preparation industry. We visited 

commercial paid preparers with 10 or more locations. We did not visit 

any law firms, Certified Public Accountant (CPA) firms, or single-office 

tax return preparation businesses.

• We developed correct tax returns for each scenario with input from tax 

experts. Specifically, we consulted with the Joint Committee on 

Taxation to ensure the responses prepared for each scenario were 

accurate and consistent with the tax code.4

 4

The Joint Committee on Taxation is a nonpartisan committee of the U.S. Congress. Its 

professional staff consists of economists, attorneys, and accountants, who assist 

Members of the majority and minority parties in both houses of Congress. The Committee 

is a respected source of expertise on tax legislation.

For each of the 19 visits, 

we then compared the tax returns produced by the paid preparers 

with those we prepared. To minimize any potential for paid preparers 

to have legitimately different results from our returns, we provided 

guidance to our investigators for answering the preparers’ questions 

consistently with the facts we used in preparing our mock returns.
Page 3 GAO-14-467T 

• We analyzed IRS’s National Research Program (NRP) database, 

which broadly tracks compliance, for tax year 2006 through tax year 

2009 (the most recent years available) to compare the estimated 

compliance found on returns completed by paid preparers and those 

that were not.5

We conducted all of our work in accordance with generally accepted 

government auditing standards. Those standards require that we plan 

and perform the audit to obtain sufficient, appropriate evidence to provide 

a reasonable basis for our findings and conclusions based on our audit 

objectives. We believe that the evidence obtained provides a reasonable 

basis for our findings and conclusions based on our audit objectives.

Our investigative work was conducted from January through February 

2014 in accordance with standards prescribed by the Council of the 

Inspectors General on Integrity and Efficiency. During our investigation, 

we conducted 19 undercover site visits.

We provided IRS with a draft of this statement and officials provided us 

with technical comments which we incorporated.

A paid preparer is simply anyone who is paid to prepare, assist in 

preparing, or review a taxpayer’s tax return. In this statement, we refer to 

two categories of paid preparers—tax practitioners and unenrolled 

preparers. CPAs, attorneys, and enrolled agents are tax practitioners.6

Tax practitioners differ from unenrolled preparers in that they can practice 

before IRS, which includes the right to represent a taxpayer before IRS, 

prepare and file documents with IRS for the taxpayer, and correspond 

and communicate with IRS.7

 5

IRS uses NRP data to, among other things, analyze taxpayer compliance, assess the 

effectiveness of compliance programs and treatments in use by IRS, and develop 

workload selection formulas.

We use the term unenrolled preparer to 

6

Tax practitioners also include Enrolled Retirement Plan Agents and Enrolled Actuaries.

7

In limited circumstances, unenrolled preparers who sign a return may act as the 

taxpayer’s representative if accompanied by the taxpayer, or by filing a written 

authorization from the taxpayer. This representation is limited to practice before examining 

officers in certain examination divisions, and may only encompass matters concerning the 

tax liability of the taxpayer for the year covered by the return. See IRS Publication 470 

(Rev. Proc. 81-38).

IRS’s Authority to 

Regulate Paid 

Preparers Is Limited, 

Although Use of 

Preparers is High
Page 4 GAO-14-467T 

describe the remainder of the paid preparer population. In most states, 

anyone can be an unenrolled preparer regardless of education, 

experience, or other standards.

Tax practitioners are subject to standards of practice under the 

Department of Treasury Circular No. 230.8

In April 2006, we made a recommendation to IRS to conduct research on 

the extent to which paid preparers meet their responsibility to file accurate 

and complete tax returns.

Enrolled agents are generally 

required to pass a three-part examination and complete annual continuing 

education, while attorneys and CPAs are licensed by states but are still 

subject to Circular 230 standards of practice if they practice before IRS. 

Generally, unenrolled preparers are not subject to these requirements.

9 To address this recommendation, IRS 

conducted a study of the quality of paid preparers and issued a report 

recommending increased oversight of paid preparers.10

Prior to the deadline for unenrolled preparers to pass a competency exam 

or complete continuing education credits, a complaint was filed in the U.S. 

District Court for the District of Columbia (District Court) challenging IRS’s 

authority to regulate preparers under Circular 230.

Recommendations included (1) mandatory registration, (2) competency 

testing and continuing education, and (3) holding all paid preparers—

including unenrolled preparers—to Circular 230 standards of practice. 

IRS implemented each recommendation through regulations issued in 

September 2010 and June 2011. The June 2011 regulations amended 

Circular 230 and established a new class of practitioners called 

“registered tax return preparers.” IRS intended for these new 

requirements to support tax professionals, increase confidence in the tax 

system, and increase taxpayer compliance.

11

 8

Department of the Treasury, Regulations Governing Practice before the Internal Revenue 

Service, Circular No. 230. 

In January 2013, the 

District Court concluded that IRS lacked the statutory authority to regulate 

all paid preparers, and ruled that IRS could not continue implementing its 

9

GAO-06-563T. 

10Internal Revenue Service, Return Preparer Review, IRS Publication 4832 (December 

2009).

11According to IRS officials, approximately 84,148 competency exams were taken prior to 

the District Court’s decision.
Page 5 GAO-14-467T 

new testing and continuing professional education requirements. IRS 

appealed the order, but it was affirmed in February 2014 by the U.S. 

Court of Appeals for the District of Columbia Circuit. Figure 1 provides a 

summary timeline of IRS’s implementation of paid preparer requirements 

and legal proceedings.12

Figure 1: Timeline of IRS Paid Preparer Regulations

The President’s Fiscal Year 2015 budget, 

released in March 2014, included a proposal to explicitly provide the 

Secretary of the Treasury and IRS with the authority to regulate all paid 

preparers.

Note: aCertain paid preparers became registered tax return preparers under an IRS program that IRS 

is no longer able to enforce due to a District Court injunction. We refer to this group as unenrolled

preparers.

 12Loving v. IRS, 917 F. Supp. 2d 67 (D.D.C. 2013), aff’d 742 F.3d 1013 (D.C. Cir. 2014).
Page 6 GAO-14-467T 

Although the District Court determined that IRS does not have the 

authority to regulate unenrolled preparers, the decision did not affect the 

requirement that all paid preparers obtain a Preparer Tax Identification 

Number (PTIN) and renew their PTIN annually.13 As of March 16, 2014,

approximately 676,000 paid preparers have registered or renewed their 

PTINs.14

Figure 2: Number of Preparer Tax Identification Numbers (PTINs) by Type of Paid 

Preparer for Processing Year 2014

As shown in figure 2, the two largest categories of PTIN 

registrations and renewals are unenrolled preparers—55 percent—and 

CPAs—31 percent.

Notes: Paid preparers may have more than one credential.

a

Other category includes Enrolled Retirement Plan Agents, Certifying Acceptance Agents, and 

Enrolled Actuaries.

Currently, Oregon, Maryland, California, and New York regulate paid 

preparers. Both Oregon and California began to regulate paid preparers 

in the 1970s, while Maryland and New York’s programs were 

 13Unlike the majority of the paid preparer regulations, IRS has the statutory authority to 

require that tax return preparers obtain a PTIN under 26 U.S.C. § 6109.

14This number represents most of the paid preparers who are expected to register this 

year and is consistent with the number of registrations in 2012 and 2013. 

Four States Regulate Paid 

Preparers, but 

Requirements Vary
Page 7 GAO-14-467T 

implemented more recently. Further, the programs themselves involve 

different types of requirements for paid preparers as illustrated in table 1.

Table 1: Comparison of State-Level Paid Preparer Requirements 

Requirements Oregon Maryland California New York 

Registration Yes Yes Yes Yes 

Qualifying education Yes Yesa Yes No 

Continuing education Yes Yes Yes No 

Testing Yes Yesb Noc No 

Date of implementation 1973 2008 1974 2009 

Source: GAO review of state laws.

Notes: aQualifying education requirements in Maryland do not require prior tax education. 

b

Paid preparers in Maryland do not have to pass a qualifying test until after December 31, 2014. 

c

Paid preparers in California who take self-study courses for qualifying education must pass a final 

exam as a means for evaluating successful completion of the course.

In August 2008—prior to Maryland and New York implementing paid 

preparer requirements—we reported on state-level paid preparer 

requirements in California and Oregon.15

According to our analysis of IRS tax year 2001 NRP data, Oregon returns 

were more likely to be accurate while California returns were less likely to 

be accurate compared to the rest of the country after controlling for other 

factors likely to affect accuracy. Specifically, in August 2008, we found 

that the odds that a return filed by an Oregon paid preparer was accurate 

were 72 percent higher than the odds for a comparable return filed by a 

paid preparer in the rest of the country.

Specifically, we reported that 

both California and Oregon have requirements that paid preparers must 

meet before preparing returns; of the two states, Oregon has more 

stringent requirements.

16

 15See GAO-08-781. 

16These results are consistent with, but do not prove, that Oregon’s regulations lead to 

some increased tax return accuracy. 
Page 8 GAO-14-467T 

According to IRS’s SOI data, an estimated 81.2 million or 56 percent of 

approximately 145 million individual tax returns filed for tax year 2011 

were completed by a paid preparer. Estimated use of paid preparers was 

fairly evenly distributed across income levels, and as table 2 shows, 

taxpayers with more complex returns used preparers the most. For 

example, preparers were more commonly used by taxpayers who filed 

the Form 1040 as opposed to the 1040EZ or 1040A and those claiming 

itemized deductions or the Earned Income Tax Credit (EITC).

Table 2: Individual Taxpayers’ Estimated Use of Paid Preparers, by Various 

Groupings, Tax Year 2011

Taxpayer grouping and subgrouping Estimate (percent) 

Adjusted gross income levels

$0–20,000 54

20,001–40,000 54

40,001–60,000 56

60,001–80,000 59

80,001–100,000 58

Over 100,000 63

All adjusted gross income levels 56

Type of return 

Form 1040EZ 41

Form 1040A 50

Form 1040 63

Filing status 

Single 50

Head of household 61

Married filing jointly 62

Type of deductions 

Standard 53

Itemized 63

Earned Income Tax Credit 

Not claimed 55 

Claimed 59

Source: GAO analysis of SOI data for tax year 2011.

Note: All percentage estimates have 95 percent confidence intervals that are within 10 percentage 

points of the estimate itself, and all numerical estimates other than percentages have 95 percent 

confidence intervals that are within 10 percent of the estimate itself. 

Use of Paid Preparers 

Varied by Complexity of 

Tax Return, but Often 

Resulted in Larger 

Refunds
Page 9 GAO-14-467T 

Across all income levels taxpayers who used paid preparers had a higher 

median refund than those who prepared their own returns at statistically 

significant levels, as shown in table 3. Specifically, individual taxpayers 

who used a paid preparer had an estimated median tax refund across all 

adjusted gross income levels that was 36 percent greater than taxpayers 

who prepared their own return.

Table 3: Estimated Median Refunds on Returns Filed by Individual Taxpayers Using 

Paid Preparers and Those Preparing Their Own Returns, Tax Year 2011

Income level Preparing own return Using a paid preparer

$0-20,000 $1,499 $2,125

20,001-40,000 857 1,114

40,001-60,000 1,606 2,184

60,001-80,000 1,949 2,213

80,001-100,000 2,208 2,700

Over 100,000 2,499 2,971

All adjusted gross income levels 3,143 4,277

Source: GAO analysis of IRS SOI data for tax year 2011.

Note: All percentage estimates have 95 percent confidence intervals that are within 10 percentage 

points of the estimate itself, and all numerical estimates other than percentages have 95 percent 

confidence intervals that are within 10 percent of the estimate itself. 

Taxpayers rely on paid preparers to provide them with accurate, 

complete, and fully compliant tax returns; however, tax returns prepared 

for us in the course of our investigation often varied widely from what we 

determined the returns should and should not include, sometimes with 

significant consequences. Many of the problems we identified would put 

preparers, taxpayers, or both at risk of IRS enforcement actions. The 

NRP’s review of tax returns from 2006 through 2009 also found many 

errors on returns prepared by paid preparers, and some of those errors 

were more common on paid prepared returns than on self-prepared 

returns.

Nearly all of the returns prepared for our undercover investigators were 

incorrect to some degree, and several of the preparers gave us incorrect 

tax advice, particularly when it came to reporting non-Form W-2 income 

and the EITC. Only 2 of 19 tax returns showed the correct refund amount. 

While some errors had fairly small tax consequences, others had very

Limited Investigation 

and IRS Data Reveal 

Significant Errors in 

Returns Prepared by 

Paid Preparers

Nineteen Site Visits 

Revealed Significant

Paid Preparer Errors
Page 10 GAO-14-467T 

large consequences resulting in the overstatement of refunds from $654 

to $3,718.

Our undercover investigators visited 19 randomly selected tax preparer 

offices—a non-generalizeable sample—to have taxes prepared. We 

developed two taxpayer scenarios based on common tax issues that we 

refer to as our “Waitress Scenario” and our “Mechanic Scenario.” Key 

characteristics of each scenario are summarized in table 4.

Table 4: Key Characteristics of Taxpayer Scenarios

Waitress scenario Mechanic scenario

• Single mother whose occupation is a 

waitress with cash and noncash tips.

• One child who lived with her during 

2013 and one child who did not—both 

under 15 years of age.

• Deductions include student loan 

interest.

• Eligible to claim the Earned Income 

Tax Credit (EITC).

• This scenario was used in 10 site 

visits.

• Married couple filing jointly; husband is 

a mechanic and his wife is a 

homemaker.

• Three children live at home aged 7,15 

and 20.

• Itemized deductions include mortgage 

interest, state sales tax, and charitable 

gifts.

• Both husband and wife have non-Form 

W-2 business income, including 

mileage reimbursement.

• This scenario was used in 9 site visits.

Source: GAO analysis.

Refund amounts derived by the 19 preparers who prepared tax returns 

based on our two scenarios varied greatly. For our waitress scenario, the 

correct refund amount was $3,804, however, refund amounts on returns 

prepared for our undercover investigators ranged from $3,752 to $7,522. 

Similarly, the correct refund amount for the mechanic scenario was 

$2,351; however, refunds ranged from $2,351 to $5,632. Paid preparer 

errors generated during our 19 non-generalizeable visits resulted in 

refund amounts that varied from giving the taxpayer $52 less to $3,718 

more than the correct amount. Of the 19 paid preparers we visited, 2 

determined the correct refund amount: one correct tax return was 

prepared for the waitress scenario and one for the mechanic scenario. An 

additional 4 paid preparers calculated tax returns within $52 of the correct 

refund amount. On the remaining 13 tax returns—7 for the waitress 

scenario and 6 for the mechanic scenario—preparers overestimated the 

total refund by $100 or more. Figure 3 shows the amount of the refund 

over and under the correct refund amount.

Errors in Tax Preparation 

Resulted in Inaccurate 

Refund Amounts
Page 11 GAO-14-467T 

Figure 3: Refund Amounts Over or Under Correct Amount

Notes: aWe determined that the tax return with an estimated refund amount of $1 over the correct 

amount was calculated correctly. The difference is attributable to a rounding error.

In some instances, paid preparers made similar errors across multiple site 

visits. For example, on the waitress return paid preparers made two of the 

same errors: (1) not claiming the unreported cash tips and (2) claiming 

both children as eligible to receive the EITC. These errors resulted in 

clusters of overstated refunds. In four site visits, paid preparers not 

claiming unreported cash tips resulted in a refund amount overstated by 

$654. In three site visits, paid preparers made both errors, which resulted 

in a refund amount overstated by $3,718. In the mechanic scenario, paid 

preparers that did not include side income resulted in tax refunds that 

ranged from $2,677 to $3,281 above the correct refund amount.
Page 12 GAO-14-467T 

A majority of the 19 paid preparers we visited made errors on common 

tax return issues; on some lines of the tax return most paid preparers 

were correct. Some of the most significant errors involved paid preparers 

(1) not reporting non-Form W-2 income, such as unreported cash tips, in 

12 of 19 site visits; (2) claiming an ineligible child for the EITC in 3 of 10 

site visits; and (3) not asking the required eligibility questions for the 

American Opportunity Tax Credit. Such errors could lead taxpayers to 

underpay their taxes and may expose them to IRS enforcement actions. 

By contrast, in some instances the majority of preparers took the right 

course of action. For example, 17 of 19 paid preparers completed the 

correct type of tax return and 18 of 19 preparers correctly determined 

whether to itemize or claim the standard deduction. Our results are 

summarized in figure 4.

Quality and Accuracy of 

Tax Preparation Varied 

Based on the Scenario 

and Specific Form or

Line Number
Page 13 GAO-14-467T 

Figure 4: Summary of Paid Preparer Site Visit Results

Type of tax return. Paid preparers completed the correct type of tax 

return—the Form 1040—for 17 of 19 site visits. Two paid preparers 

incorrectly completed the Form 1040A for the waitress scenario. The 

Form 1040A should not have been used because the waitress 

received tip income that was not reported to her employer.17

 17According to IRS guidance, Form 1040 and Form 4137 must be used if tip income not 

reported to the employer is $20 or more in any month.
Page 14 GAO-14-467T 

Dividend and capital gains income. Preparers recorded the income 

correctly on 8 of 9 returns. The mechanic received qualified and 

ordinary dividends, and capital gains from a mutual fund that were 

reinvested into the fund. This income was documented on a third 

party reporting form; the Form 1099-DIV. According to IRS guidance, 

a Form 1099-DIV must be filed for any person who receives dividends 

of $10 or more, including for funds that are reinvested.

Total income. Of the 10 waitress returns prepared for us, 3 included 

the unreported cash tip income. However, only one of the three 

returns included the correct amount of tip income. Total income for the 

waitress scenario should include income documented on the Form W2, as well as the amount of unreported cash tip income offered by our 

investigator to the paid preparer during the site visit. The two returns 

that did not include the correct amount of tip income included lesser 

amounts.

Total income for the mechanic return should include non-Form W-2 

business income—resulting from mechanic work and babysitting 

conducted outside of a formal employment arrangement—and income 

from ordinary dividends and capital gains. Of the 9 mechanic returns 

prepared for us, 4 returns included both the business income and the 

investment income. However, only 3 returns included the correct 

amounts of business and investment income.18

Incorrectly reporting income often resulted in cascading errors on 

other lines of the tax return. Tax returns that did not include side 

income had errors in credits that are calculated based on income. For 

 18The mechanic tax return should have included a Schedule C, Profit or Loss from 

Business. The income also required a Schedule SE for self-employment taxes.

Waitress Scenario, Site Visit #5

In response to the investigator mentioning her unreported cash tip 

income, one paid preparer told her that tips not included on the Form 

W-2 do not need to be reported.

Mechanic Scenario, Site Visit #1

One paid preparer who did not accurately record the investment income 

said that it was not necessary to include income that was reinvested in a 

mutual fund.
Page 15 GAO-14-467T 

example, if a paid preparer did not report side income in the mechanic 

scenario, the resulting total income would make the mechanic eligible 

for the EITC when he otherwise would not be eligible. Similarly, 

because two paid preparers incorrectly chose not to include 

unreported tip income for the waitress, they selected the wrong type 

of tax return, the Form 1040A.

Itemized or standard deduction. All but one of the 19 returns 

correctly recorded the most advantageous deduction for the two 

scenarios. According to IRS guidance, taxpayers should itemize 

deductions when the amount of their deductible expenses is greater 

than the standard deduction amount. For the waitress scenario, the 

most advantageous deduction would be the standard deduction for 

head of household, and for the mechanic scenario, the itemized 

deductions were more advantageous. One paid preparer chose to use 

the standard deduction for the mechanic, even though it was 

approximately $3,000 less than the total amount of the itemized 

deductions we included in the scenario.

Child-care expenses. All 19 paid preparers did not record child-care 

expenses because neither the waitress nor mechanic was eligible to 

receive the credit. While none of the paid preparers recorded the 

credit, the reasons the preparers cited were often incorrect. According 

to IRS guidance, a taxpayer must attempt to collect the Social 

Security number of his or her child-care provider, but if unsuccessful, 

can report that fact to IRS and still claim the credit. For the waitress 

scenario, the reason that she was ineligible to claim the child-care 

expenses was that she did not attempt to get her child-care provider’s 

Social Security number. Upon learning that she did not have the 

Social Security number of the provider, several of the paid preparers 

did not enter her child care expenses on her return.

IRS guidance states that qualified child-care expenses only include 

amounts paid while the taxpayer worked or looked for work. The 

mechanic and his wife were not eligible for the credit because the 

child-care expenses were incurred for running errands, and not so 

that either parent could work. Again, many tax preparers said that the 

reason the credit could not be claimed was because the mechanic did 

Mechanic Scenario, Site Visits #3 and #9

Two paid preparers demonstrated what the refund amount would be if the 

side income were reported compared to if it were not reported. Both 

preparers did not record the side income.
Page 16 GAO-14-467T 

not have the child-care provider’s Social Security number, not 

because he was otherwise ineligible.

Student loan interest. Eight of 10 paid preparers correctly included 

the deduction for student loan interest. The waitress’s Form 1098-E 

shows the interest the lender received from the taxpayer on qualified 

student loans. A taxpayer receives a Form 1098-E if student loan 

interest of $600 or more is paid during the year.

Sales tax deduction. Seven of 9 preparers recorded sales tax as a 

deduction on the mechanic’s tax return, however not all chose the 

most advantageous amount. According to IRS guidance, taxpayers 

who itemize deductions can choose whether to deduct local income 

taxes or sales taxes. Because the mechanic lived in a state that did 

not have income tax, sales tax should have been deducted. Of the 7 

paid preparers that deducted sales taxes, only 2 recorded the amount 

that was most advantageous to the taxpayer. IRS provides an online 

calculator to help taxpayers estimate the amount of sales taxes they 

likely paid in a year. To determine this estimate, taxpayers input basic 

information such as ZIP code and annual income in the calculator.

Five preparers chose amounts that were lower than the amount the 

calculator estimated.

Social Security and Medicare tax on unreported tips. Two of 10 

paid preparers completed the Form 4137 and reported the amount of 

taxes owed on the tip income. Because the waitress received 

unreported cash tips, the amount of taxes owed on the unreported 

cash tip income should be calculated using the Form 4137.19

Earned Income Tax Credit. The EITC on line 64a was another area 

where paid preparers made mistakes that resulted in a significant 

overstatement of the refund. Of the 10 returns prepared for the 

waitress, 3 reported two children on the Schedule EIC, instead of the 

However, one of the preparers included a lesser amount of tip income 

when performing the calculation, resulting in a smaller amount of 

taxes owed. Another preparer reported the tip income by incorrectly 

completing a Schedule C, Profit or Loss from Business, and a 

Schedule SE for self-employment taxes.

 19Form 4137, Social Security and Medicare Tax on Unreported Tip Income.
Page 17 GAO-14-467T 

one child who lived with the taxpayer in 2013 and was eligible for the 

EITC.20

American Opportunity Tax Credit. All 9 paid preparers correctly 

chose the American Opportunity Tax Credit for the mechanic 

scenario. The mechanic had a 20-year-old son attending a community 

college and paid for both his tuition and books. According to IRS 

guidance, to be eligible for this credit, a student must meet certain 

requirements including full-time enrollment at least half the year and 

no felony drug offense convictions. Although we instructed the 

investigator to respond to paid preparer inquiries such that his son 

met these requirements, some paid preparers did not ask the required 

questions to determine eligibility.

All paid preparers are subject to certain requirements in the Internal 

Revenue Code (IRC) and may be subject to penalties for noncompliance. For example, the IRC imposes monetary penalties on paid 

preparers who understate a taxpayer’s tax liability due to willful or 

reckless conduct. As shown in figure 5, in 12 of 19 cases, paid preparers 

did not record additional side income not reported on Form W-2’s and 

may be subject to this penalty. The IRC also requires that paid preparers 

sign the tax return and furnish an identifying number. In 3 of 19 cases, 

preparers did not meet the signature requirement. In addition, 3 preparers 

used a PTIN that did not belong to them and one used a fake PTIN.

Additionally, 3 of 10 preparers in our study may be subject to a penalty for 

not meeting due diligence requirements when determining if both of the 

 20IRS estimated that for fiscal year 2013 the level of improper overclaims for the EITC 

range from $13.3 to $15.6 billion of approximately $60.3 billion in total program payments. 

The projection of estimated overclaims for fiscal year 2013 is based on tax year 2009 

reporting compliance study. See Department of Treasury, Fiscal Year 2013 Agency 

Financial Report, December 16, 2013.

Improper Conduct

May Subject Preparers

to Internal Revenue

Code Penalties

Waitress Scenario, Site Visit #4

One paid preparer questioned the investigator on the amount of time her 

older child lived with her. The investigator responded that the older child 

stayed with her on weekends. The paid preparer discussed the 

investigator’s response with the office manager and then stated that she 

can claim the child for the EITC if no one else does, which was not 

correct.
Page 18 GAO-14-467T 

waitress’s children qualified for the EITC. When considering the EITC, 

paid preparers must meet four due diligence requirements. Generally, if 

paid preparers file EITC claims, they must (1) ask all the questions to get 

the information required on Form 8867, Paid Preparers’ Earned Income 

Credit Checklist; (2) compute the amount of the credit using the EITC 

worksheet from the Form 1040 instructions or a similar document; (3) ask 

additional questions when the information the client gives the preparer 

seems incorrect, inconsistent, or incomplete; and (4) keep a copy of Form 

8867, the EITC worksheets, and other records used to compute the 

credit.

Figure 5: Selected Internal Revenue Code Penalties

Because the returns we had prepared were not real returns and were not 

filed, penalties would not apply. However, we plan to refer the matters we 

encountered to IRS so that any appropriate follow-up actions can be 

taken.
Page 19 GAO-14-467T 

The fees charged for tax preparation services varied widely across the 19 

visits, sometimes between offices affiliated with the same chain. Often, 

paid preparers either did not provide an estimate of the fees upfront or the 

estimate was less than the actual fees charged. In several instances, 

upon completion of the tax return, the preparer initially charged one fee, 

then offered a reduced amount. Figure 6 shows the fees charged by each 

of the 19 paid preparers we visited for each scenario. For the waitress 

scenario, the final fees charged for tax preparation ranged from $160 to 

$408. For the mechanic scenario, the final fees charged for tax 

preparation ranged from $300 to $587. For the two correct tax returns that 

were prepared, the final fee charged was $260 for the waitress scenario 

and $311 for the mechanic scenario. Some paid preparers provided 

receipts that listed total charges that were higher than the “discounted”

amount ultimately charged. For example, one preparer estimated the cost 

of services to be $794, but then charged the taxpayer $300.

Paid preparers provided various reasons for the amount of the tax 

preparation fee, including, (1) the EITC form is the most expensive form 

to file, (2) the pricing and fees are at their peak from mid-January through 

February and then go down, and (3) there is a price difference depending 

if the tax return is completed in the morning or the evening.

Fees Charged for

Tax Preparation Varied

Widely Across Paid 

Preparer Site Visits
Page 20 GAO-14-467T 

Figure 6: Fees Charged for Tax Preparation Services

As in our limited investigation, our estimates from NRP data suggest that 

tax returns prepared by paid preparers contained a significant number of 

errors.21

 21IRS NRP data for tax years 2006 through 2009. 

As shown in table 5, returns prepared by a paid preparer showed 

a higher estimated error rate—60 percent—than returns prepared by the 

taxpayer—50 percent. Errors in this context changed either the tax due or 

the amount to be refunded. As noted before, it is important to remember 

that paid preparers are used more often on more complicated returns 

than on simpler ones, although we were unable to gauge the full extent to 

which this might be true. Furthermore, errors on a return prepared by a 

paid preparer do not necessarily mean the errors were the preparer’s 

IRS Data Suggest Errors 

on Paid Preparer Returns 

Were Similar to Those 

Generated During Our

Site Visits
Page 21 GAO-14-467T 

fault; the taxpayer may be to blame. Preparers depend upon the 

information provided by the taxpayer.

Table 5: Estimated Percentage of Individual Returns with Errors

Preparer type Estimate (percent) 

Prepared by a paid preparera 60

Prepared by the taxpayer 50

All returns 55 

Source: GAO analysis of IRS NRP data tax years 2006 through 2009.

Notes: All percentage estimates have 95 percent confidence intervals that are within 10 percentage 

points of the estimate itself, and all numerical estimates other than percentages have 95 percent 

confidence intervals that are within 10 percent of the estimate itself. 

a

Analysis of paid preparer returns includes both tax practitioners, such as CPAs, attorneys and 

enrolled agents and unenrolled preparers.

In addition to different rates of errors on paid preparer filed returns and 

self-prepared returns, the amount taxpayers owed IRS also differed. 

Specifically, the estimated median amount owed to IRS was higher for 

paid preparer filed returns. For instance, as shown in table 6, it is 

estimated that taxpayers using a paid preparer owed a median of $354 to 

IRS, compared with $169 for taxpayers preparing their own return.

Table 6: Estimated Median Additional Taxes Owed on Individual Returns

Preparer type Estimate Lower bound Upper bound 

Prepared by a paid preparera $354 $337 $377

Prepared by the taxpayer 169 155 184

All returns 263 245 281

Source: GAO analysis of IRS NRP data for tax years 2006 through 2009.

Notes: All percentage estimates have 95 percent confidence intervals that are within 10 percentage 

points of the estimate itself, and all numerical estimates other than percentages have 95 percent 

confidence intervals that are within 10 percent of the estimate itself. 

a

Analysis of paid preparer returns includes both tax practitioners, such as CPAs, attorneys and 

enrolled agents and unenrolled preparers.

NRP estimates show that both individuals and paid preparers make errors 

on specific forms and lines of Form 1040, some of which we experienced 

in our undercover visits. Table 7 shows that in many instances, returns 

completed by a paid preparer are estimated to have a greater percentage 

of errors compared to self-prepared returns. For example, of returns 
Page 22 GAO-14-467T 

prepared by a paid preparer, 51 percent have an error on the EITC line 

compared to 44 percent of self-prepared tax returns. In total, for five line 

items we analyzed, the difference in the percent of errors on returns 

prepared by a paid preparer was statistically greater than the percent of 

errors on self-prepared returns. These line items include (1) the itemized 

or standard deduction, (2) business income, (3) total income, (4) the 

EITC, and (5) the refund amount. Differences between the percent of 

returns with errors on the student loan interest deduction line, the 

unreported Social Security and Medicare tax on tips line, and the 

education credit line were not statistically significant when comparing 

returns done by a paid preparer to those that were self-prepared.

Table 7: Estimated Percentages of Individual Returns Containing Specific Line 

Items with Errors

Form 1040 line item

Self-prepared returns 

(percent)

Returns done by a paid 

preparera (percent)

Itemized or standard deduction 28 38

Business income (or loss) from 

Schedule C or C-EZ 

73 77

Total income 36 44

Student loan interest deduction 30 34

Unreported Social Security and 

Medicare tax on tips

51 52

Earned Income Tax Credit 44 51

Education credit 43 45

Refund amount 50 60

Source: GAO analysis of IRS NRP data for tax years 2006 through 2009.

Notes: All percentage estimates have 95 percent confidence intervals that are within 10 percentage 

points of the estimate itself, and all numerical estimates other than percentages have 95 percent 

confidence intervals that are within 10 percent of the estimate itself.

a

Analysis of paid preparer returns includes both tax practitioners, such as CPAs, attorneys and 

enrolled agents and unenrolled preparers.

Over half of all taxpayers rely on the expertise of a paid preparer to 

provide advice and help them meet their tax obligations. IRS regards paid 

preparers as a critical link between taxpayers and the government.

Consequently, paid preparers are in a position to have a significant 

impact on the federal government’s ability to collect revenue and 

minimize the estimated $385 billion tax gap. As of March 2014, 55 

percent of paid tax preparers are unenrolled preparers, not regulated by 

Conclusions
Page 23 GAO-14-467T 

IRS. Undoubtedly, many paid preparers do their best to provide their 

clients with tax returns that are both fully compliant with the tax law and 

cause them to neither overpay nor underpay their federal income taxes.

However, IRS data, which more broadly track compliance, show 

preparers made serious errors, similar to the findings from our site visits. 

The higher level of accuracy of Oregon’s tax returns compared to the rest 

of the country suggests that a robust regulatory regime involving paid 

preparer registration, qualifying education, testing, and continuing 

education may help facilitate improved tax compliance. The courts 

determined that IRS does not have sufficient authority to regulate 

unenrolled preparers. In March 2014, the administration proposed that the 

Treasury and IRS be granted the explicit authority to regulate all paid 

preparers. Providing IRS with the necessary authority for increased 

oversight of the paid preparer community will help promote high-quality 

services from paid preparers, will improve voluntary compliance, and will 

foster taxpayer confidence in the fairness of the tax system.

If Congress agrees that significant paid preparer errors exist, it should 

consider legislation granting IRS the authority to regulate paid tax 

preparers.

Chairman Wyden, Ranking Member Hatch, and Members of the 

Committee, this concludes my statement. I would be pleased to respond 

to any questions that you may have.

For questions about this statement, please contact James R. McTigue, Jr. 

at (202) 512-9110 (mctiguej@gao.gov). Individuals making key 

contributions to this testimony include: Wayne A. McElrath, Director; 

Libby Mixon, Assistant Director; Gary Bianchi, Assistant Director; Amy 

Bowser; Sara Daleski; Mary Diop; Rob Graves; Barbara Lewis; Steven 

Putansu; Ramon Rodriguez; Erinn L. Sauer; and Julie L. Spetz.

Matter for 

Congressional 

Consideration

Contacts and 

Acknowledgments

(451077)
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